Green company cars: Less gas… less tax

The government’s intent to cut the country’s carbon emissions means there are tax savings to be had in using low carbon emission vehicles. Nick Golding details what drives these savings and names the guilty gas-guzzlers.

The savings available tend to depend on how companies source their cars, but as a general rule, once employees are behind the wheel of a vehicle producing less than 160 grams of CO2 per kilometre (g/km), both the driver and the employer stand to be quids in.

The dreaded benefit-in-kind tax is the one that all company car drivers must pay, although this is one area where greener cars can help to make savings. The largest amount can be saved when driving a car that produces 120g/km or less, while drivers in high-emission cars producing 235g/km are penalised and forced to pay the most.

Save on tax

Alastair Kendrick, tax director at Mazars, explains: “As the employee, your benefit-in-kind tax is computed by the list price of the car and the CO2 emission of the vehicle, so clearly if you are pulling down on CO2 emissions, you will save on tax.”

Lower CO2-producing vehicles tend to have a higher residual value than higher producing models, which makes them far more cost effective under leasing arrangements, where a car’s depreciation rate dictates the vehicle’s monthly cost over a fixed period.

Mark Sinclair, director of Alphabet, adds: “There is such a focus now on residual value, and lower CO2 cars tend to have a high residual value, and so depreciate less over a set period of time, whereas the high CO2 cars do not. There is less demand for the higher CO2 cars in the marketplace.”

But a more recent change that is forcing companies towards greener cars is based on capital allowances. Changes introduced last month allow employers that are leasing cars below the 160g/km threshold to get full tax relief on that car as a deduction against their profit.

However, vehicles above this mark benefit from a lower level of tax relief, at 85%, so employers leasing such cars are unable to claim back the tax on 15% of the car’s cost.

Everything about lower-emission cars is tempting from a cost point of view. The only challenge for employers comes when trying to convince employees who see their car as a status symbol to swallow their pride and ditch the gas-guzzler.

Kendrick adds: “Many people see the car as their status sitting on their driveway and may want to hold on to what they have always been given, even in these economic climates.”

Informed decisions

However, education and technology can hold the key to helping these reluctant drivers make informed decisions, says fleet expert Andrew Cope, chief executive at provider Zenith Provecta. In particular, online car comparison tools can encourage drivers who are under no obligation to go green to take the tax-efficient option. “This is really about educating the driver and using technology to create visibility and transparency around the implications of driving green cars.”

Failing this, some employers are seeing real value in cold hard cash, passing back some of the savings to the drivers, and luring them into low CO2 cars with added financial incentives.

Cope adds: “If the company is to make savings on the back of an employee choosing a certain car, just offer two-thirds of that saving to the employee in the form of additional cash top-ups.”

Case study: Deloitte

For both tax-efficiency purposes and also to encourage environmentally friendly practice among employees, accountancy firm Deloitte has adopted a strategy of educating staff members to help them make informed car selections.

Technology is used to illustrate the financial advantages for employees who choose the greener option, and staff can easily compare one car with another before making their selection.

Mike Moore, a tax director at Deloitte, explains: “The screen displays the tax situation in net terms. Though ultimately it is their choice, this actually allows our employees to make a direct comparison [before selecting their vehicles].”

However, a slightly harder line is taken among the non-senior drivers who are not awarded a car as a benefit or because of their position in the company.

To maximise the tax efficiency of its company car scheme, Deloitte permits only non-benefit car drivers to make selections from a list of cars that are 120g/km or below. This way the company can be sure one section of the workforce is operating in the most tax-efficient way possible.

The good, the bad, and the guzzly

Car tax (Road Fund Licence) rates range from £35 to £400 a year depending on emissions.